Technical support breaking down
Technical support is starting to break down for the first time in a long time. These two charts tell it all. First of all, on Tuesday several charts had interesting square outs. The SPX, with a high at 2378, came to a near term Andrews channel at 78 hours and started to bounce. According to chaos theory, that is a bit of new information for participants to digest. It was important support but just because it squared out, that didn’t mean it was going to hold. Square outs are like anything else, they are technical markers which are prone to surrendering to bigger relationships. That means an hourly relationship isn’t going to hold if it’s really time for the market to go. Put it another way, all support or resistance levels are like sports records. Sooner or later they will be broken.
When the trend changes, there always comes a time when support will break. The only challenge this time is it’s been a while since support did break so most people forgot it is even a possibility. When it’s a bubble, skill gets thrown out the window and people mistake a bull market for brains. That’s how 90% of the people lost 90% of their money from 2000-02. Last week was a short week due to the holiday, but I also told you it was the Mercury retrograde period. Support formed on Tuesday and by Thursday it was broken without even a test of the upper end of the range. Not only that, look at the channel for the daily chart. Important Andrews support was broken there as well.
This is a lot to digest at one time. This channel represents the move up from the Brexit low last year. We can very easily see a drop to the bottom of this channel near 2300 where another even more important test would materialize.
What was the psychology involved in this drop? Apparently, traders are upset the administration believes it is now doubtful they can get taxes done by August. It has been my view if there is no tax cut, you can kiss the rally goodbye. So much good will was built up from the day after the election, traders bought on the come but the bought and thought isn’t working very well. The crowd may very well have to rethink all of this. It very possible David Stockman was right. Please don’t’ scream at me, I tend to think Stockman has been right. Stockman knows how difficult it is to get a tax cut and he pulled it off with Tip O’Neill Speaker of the House. Imagine Trump has both houses of Congress and they still can’t get anything done. He’s not always going to have both houses and they may very well get one in the midterm year because that’s when Congress needs us. But if taxes get done next year, that’s not this year. Elementary, dear Watson? The stock market is banking on this year.